Becker Private Equity & Business Podcast Summary

Episode Title: Navigating Tariffs and Market Uncertainty: Value Creation in M&A with Chris Felderman of Palm Tree LLC
Host: Scott Becker
Guest: Chris Felderman, Senior Managing Director and Co-Head of Consulting at Palm Tree LLC
Release Date: May 9, 2025

In this insightful episode of the Becker Private Equity & Business Podcast, host Scott Becker engages in a comprehensive discussion with Chris Felderman of Palm Tree LLC. The conversation centers around the current landscape of tariffs, market uncertainty, and their implications for mergers and acquisitions (M&A) within the private equity sector. Chris provides expert analysis on how businesses can navigate these challenges to drive value creation.

Introduction to Palm Tree LLC

[01:14] Chris Felderman:
"We like to consider ourselves the modern M&A and operations advisory firm and our primary objective... is to provide perspectives on financial and operational data to enable buyers and sellers to make more informed decisions to drive value creation."

Chris introduces Palm Tree LLC as a versatile consulting firm that blends the roles of a consulting agency and an investment bank. With a team of nearly 100 professionals across major offices, Palm Tree specializes in financial and operational due diligence, transitional services, and performance improvement to support businesses throughout the entire investment lifecycle.

The Impact of Tariffs and Market Uncertainty on M&A

The discussion begins with the current state of the M&A market, which has been experiencing fluctuations influenced by tariffs and broader economic uncertainties. Scott Becker highlights recent market volatility and references insights from industry leaders like Mark Rowan, CEO of Apollo, regarding the M&A environment.

[03:39] Chris Felderman:
"The uncertainty around [tariffs] is absolutely increasing challenges for PE firms... it's also in their ability to source, evaluate and ultimately close on those new investment opportunities."

Chris emphasizes that tariffs are not only affecting the operational aspects of portfolio companies but are also hindering private equity firms' capacity to identify and secure new investments. This dual impact creates a more challenging environment for value creation through M&A activities.

Short-Term Challenges and Strategic Responses

Focusing on immediate concerns, Chris outlines the essential steps that portfolio companies must take to mitigate the effects of tariffs.

[04:35] Chris Felderman:
"Management teams... need to identify the product and supply chain exposure that each of their portfolio companies have... assess the effect of the cost increases on both profitability and liquidity."

Key short-term strategies include:

• Supply Chain Assessment: Identifying which components and raw materials are subject to tariffs.
• Cost Analysis: Evaluating how increased costs will affect profitability and cash flow.
• Inventory Management: Deciding whether to pre-buy inventory to avoid tariffs and understanding the implications on working capital.
• Vendor Negotiations: Exploring opportunities to negotiate with suppliers to maintain margins without passing costs onto customers.

These measures are crucial for maintaining operational stability and financial health in the face of tariff-induced disruptions.

Long-Term Strategies for Sustainability

Beyond immediate actions, Chris discusses longer-term strategies that businesses can adopt to enhance resilience against tariff-related challenges.

[06:43] Chris Felderman:
"Assessing the ability to move suppliers or whether products can be redesigned with components that don't have as much exposure to tariffs."

Long-term initiatives include:

• Supplier Diversification: Reducing dependency on suppliers from regions affected by tariffs.
• Product Redesign: Modifying products to utilize components that are less susceptible to tariffs.
• Operational Flexibility: Building more adaptable supply chains that can respond to changing economic conditions.

These strategies not only mitigate the impact of current tariffs but also prepare businesses for future uncertainties.

Services vs. Goods: Differential Impact of Tariffs

Scott inquires about the varying effects of tariffs on different sectors, particularly comparing goods and services.

[07:02] Chris Felderman:
"The services side is less prone to the tariffs... we see an uptick in deal activity which is more focused on services and items that don't need to be sourced from outside of the United States."

Chris observes that the services sector is relatively insulated from the direct impact of tariffs, potentially positioning it for increased M&A activity. This sector's focus on domestic sourcing reduces vulnerability to international trade policies, making it a more attractive arena for deals amidst the current uncertainty.

Stock Market Fluctuations and Emerging Opportunities

The conversation shifts to recent positive movements in the stock market, despite previous downturns, and what this means for the M&A landscape.

[08:11] Chris Felderman:
"The uptick in the stock market is more driven on whether there's certainty or not... It has allowed itself to calm down with some recent developments and changes in the tariffs."

Chris attributes the recent stock market recovery to growing market confidence as uncertainties around tariffs begin to ease. He suggests that this stabilization may lead to renewed optimism and potential deal-making opportunities, particularly in sectors less affected by tariffs.

[09:36] Chris Felderman:
"If there is a slowdown in deals and sponsors do need to hold on to their portfolio companies a little longer than they originally anticipated, now is a good time to make additional investments in certain value creation initiatives."

In scenarios where deal flow slows down, Chris recommends that private equity firms focus on enhancing their portfolio companies through strategic investments in value creation initiatives. This proactive approach can position businesses for greater success once market conditions become more favorable.

Current Focus and Excitement at Palm Tree LLC

When asked about his current priorities, Chris shares insights into Palm Tree LLC's strategic directions amidst the evolving market dynamics.

[09:55] Chris Felderman:
"We're seeing an uptick in sort of that sell side preparedness, sell side quality of earnings, even in carve outs... there's opportunity there to get out in front of some of these tariffs and we can be helpful with that."

Despite a slowdown in buy-side M&A activity, Palm Tree is experiencing increased demand for sell-side services, including quality of earnings assessments and carve-out analyses. Additionally, the firm is actively assisting clients in navigating tariff-related challenges and preparing for future financial and operational optimizations.

Conclusion

The episode concludes with Scott expressing gratitude towards Chris and acknowledging Palm Tree LLC's expertise and proactive stance in the current economic climate. Chris reinforces the value that consulting services provide to businesses aiming to thrive amid uncertainty and market fluctuations.

This episode offers valuable perspectives for private equity professionals and business leaders on managing the complexities introduced by tariffs and market volatility. Chris Felderman's insights highlight the importance of strategic operational adjustments and the potential opportunities that arise even in challenging times.